Invest our savings differently or pay down our £350k mortgage?

scoobydoo789

Looking for some thoughts on our situation... My wife and I are mid-30’s, one child under 5, no loans or other debt. We're pretty risk averse, but think life is short and kids grow up quick - so work hard but enjoy ourselves (without going nuts). We have just my pension (15% paid in for the last 10 years). My wife is just about to start working again having changed career to teaching, and I work in a stable job.

Debt: We have £350k outstanding on our mortgage (3.39 % fixed for another 2 years) on a £650k house.

Savings: We have £90k in cash isas, £60k in savings accounts, and £120k in shares – so £270k total’ish available.

We put money away each month for living costs (car, holiday, repair house etc). but we are unlikely to be able to add to our broader savings accounts for the forseeable future as the cost of childcare etc. leaves us with little spare at the end of the month.

The question is – given we have a reasonable amount of accessible cash, is it really worth paying more into our mortgage, or would we be better to take the money and invest it with a financial advisor?

I hear people muttering of making 7% a year but a bit of me thinks – well if I achieved 7% on £270K then took 1% off for advisor fees, then paid 40% tax on what I made, I’d be left at 3.6% of £270k which is £9720 a year – but I’d still have 3.39% interest on £350k which is £11865 a year; or if I sunk £270k into my mortgage I could have an £80k mortgage and if I paid it off at the same rate each month, and have no mortgage in 5 years but also have very little cash accessible.

So my gut feel is that paying down the mortgage is the right thing to do, but with cash so cheap to borrow, and a sense that ‘once I let my cash go I’ll never free it up again’ – is the mortgage the right really the right thing to do? Could I ever get my cash out again if I sink it into the mortgage?

Any thoughts / advice welcome, I"m not really sure where to start!

Cheers

bigadaj

Paying off a mortgage is generally not recommended as returns are better elsewhere.

You don't say what you earn or your household income is, but it's presumably pretty high to maintain a mortgage of that value. Mortgage rate isn't very low, so paying down at least in part might be an option. Many balanced portfolios returned 30% last year, though largely down to sterling devaluation.

You have £150k in cash, are you playing the current account or regular saver game, if not this money is shrinking not growing. You already have £120k in shares, what is this in, is it in an isa?

You say you are struggling to save so where have the savings come from, is this before you had the child, lifestyle change, inheritance? Probably useful to do a statement of affairs to see exactly where the money is going, doesn't mean you have to change your spending pattern but will mean you have made a conscious decision to spend rather than fritter away.

Pension contributions above the higher rate threshold mean you only contribute £6 in every £10 assuming no employer matching, if employer matches then it's even better and with salary sacrifice slightly better still.

There's no need to use an adviser, do some reading and diy, monevator website is a good place to start. Once you've used up your Isa allowances (£40k for a couple from April) then you have £5k allowance for dividends tax free, and also your cgt allowance of £11k so you'll be doing well to pay tax unless you are careless.

MyOnlyPost

Firstly can you lower your mortgage costs? Rates are at an all time low and now might be a good time to reassess if not tied to a product.

Secondly can your money earn more after tax than you can save on a mortgage by paying it off?

Finally you say you are a 40% tax payer now, are you likely to be paying 40% tax in retirement? If not there can be massive advantages to paying more into pensions now because of the tax relief

Superscrooge

You describe yourself as risk averse.

The problem with equity returns is that the 7% return you quote is a long term average. Over the next 12 months equities could be up 20% or down 30%. Also interest rates are likely to be higher in two years when you remortgage.

Paying off some of the mortgage would be the less risky option.

It doesn't have to be a binary decision though. Maybe use some money for extra mortgage repayments and perhaps also increase your pension contributions?

jimjames

You say you already have £120k in shares and are risk averse. How did you invest this £120k already? If you did that yourself why do you need an adviser? What return are you getting now? Near 7%? You could move the £60k savings into ISAs this year and next and have them protected from tax.

We've invested rather than paying down mortgage and it's definitely been worthwhile for us.

bowlhead99

scoobydoo789 wrote: »

– well if I achieved 7% on £270K then took 1% off for advisor fees, then paid 40% tax on what I made...

Well, you've said £90k of your money is in ISAs, so after converting them to S&S ISAs they are not going to stop being tax free. In April you *each* get another £20k of ISA allowance plus £4k of JISA allowance for your child, so that's another £44k wrapped up as tax free (£134k total). So out of your £270k 'problem' there is only actually £136k that isn't wrapped up as tax free.

Then remember you *each* have an annual allowance of £5k a year for dividend income ; your £136k of unwrapped investments are not going to pay as much as £10k in dividends, so all your dividend income will be tax free.

Also, you *each* have an exemption for the first £11k for realised capital gains in every tax year, which is a quite nice £22k total to cover the gains you realise on your £138k portfolio. Actually, if you sold half the investments on 5 April 2018 and half on 6 April 2018, you'd have double the exemptions because of the sales being in two tax years. So, even if you sold the entire portfolio after about a year, that £44k of exemptions would be a rate of 32% of gains you could afford to make, on top of whatever you took out as tax free dividends.

And remember on 6 April 2018 you get yet another £40k of ISA allowances between you. And again in 2019.

So, far from paying 40% tax on these 7% gains you've heard about, I predict you'd pay pretty much zero tax on them assuming you structured your affairs wisely. So your misunderstanding threatens to lead you to the wrong long-term decisions - and as an aside, even after exhausting the annual allowances and exemptions, neither dividend income nor capital gains are charged at as much as 40% for a high rate taxpayer or as much as 20% for a basic rate taxpayer.

So my gut feel is that paying down the mortgage is the right thing to do, but with cash so cheap to borrow, and a sense that ‘once I let my cash go I’ll never free it up again’ – is the mortgage the right really the right thing to do? Could I ever get my cash out again if I sink it into the mortgage?

You could only get it back by formally borrowing it again at whatever prevailing rates are available to you. Which is harder to do if for example it turns out either of your jobs aren't as stable as you hoped, or you have some sort of unfortunate medical issues stopping you from working, or some other creditworthiness- impacting issue. It's very sensible to keep a large cash buffer (in high interest bank accounts), and other liquid investment assets, to cover life's trials and tribulations whether or not you choose to pay down the mortgage.

One thing you could consider if you have two years to go on the rest of your mortgage fix is check what the early repayment penalty is. Just using my lender as an example, with your <60% loan to value, you can get a 2 year fix for 1.29% with a £999 fee (or 1.69% without a fee). Those would probably both save you £7k or more over the next two years, so if your early repayment penalty on your £350k is 2% or less, would be worth investigating.

If you're concerned the rates might go up when that 2 years expire, you could even get a longer 5 year fix for about 1.9% with a fee or a bit more without.

bigadaj wrote: »

Paying off a mortgage is generally not recommended as returns are better elsewhere.

At 3.4%, the rate is higher than inflation and higher than you can get on big chunks of money in bank accounts. So for someone cautious about investment risk it can seem like a good deal.

However, it's exposed as a potentially rather less-good deal when you consider the ability to refinance down to 2% or so, and certainly in the long long term you would expect an investment portfolio to produce larger returns than a bank would want to charge for a mortgage secured over residential property worth almost twice the amount of the mortgage. Albeit with significant variability, even losses in some years.

A combination of only paying down part of the mortgage, while doing ISA investment and further pension investment (the latter with very attractive 40% tax relief) and perhaps some unwrapped investment too, is likely to be the optimum way to go. You don't quite know how the whole rest of your life will pan out, and although your wife is going back to work now, have you ruled out another child at some point in the next few years? If not, hammering down the mortgage and leaving yourself with fewer assets might not be the best way to go.

There's no need to use an adviser, do some reading and diy, monevator website is a good place to start.

I agree that lots of people self-manage their financial affairs and investments - although that often involves building them up from smaller more modest sums when consequences of getting it wrong are lower. If if one of you is career focussed and the other is just getting to grips with going back to work after a long time out, and you have £270k burning a hole in your pocket, it might be worth throwing a few thousand quid at professional advice.

Even if the end result is similar to how you would self-manage it, the peace of mind could be compelling:

Imagine I had never shown any interest in S&S investments, and when talking about them online had demonstrated a massive lack of understanding of tax breaks for example... and then I told my wife that with a few hours internet surfing I'd read on a forum how easy it was to manage your own portfolio and cut costs by not using middlemen and advisors, so I was going to take all our cash and put it into 'the markets' like it said on that nice monevator blog...

...and noted that the largest peak-to-trough drop in the FTSE World index over the last decade was only 57%, so as long as I closed my eyes and left it for a few decades it would probably all be fine... I could imagine the imagined wife saying "!!!!!!". And as soon as our portfolio moved into losses (which is normal for a mixed portfolio on a long term view), the wife would be saying she told me so.

Superscrooge wrote: »

You describe yourself as risk averse.

The problem with equity returns is that the 7% return you quote is a long term average. Over the next 12 months equities could be up 20% or down 30%. Also interest rates are likely to be higher in two years when you remortgage.

Paying off some of the mortgage would be the less risky option.

It doesn't have to be a binary decision though. Maybe use some money for extra mortgage repayments and perhaps also increase your pension contributions?

That seems to cover it. It's not a binary one-thing-or-the-other decision. Take a wide holistic view and buy in professional help if needed.

MyOnlyPost wrote: »

Finally you say you are a 40% tax payer now, are you likely to be paying 40% tax in retirement? If not there can be massive advantages to paying more into pensions now because of the tax relief

A very sensible point.

scoobydoo789

All very useful and reaffirms the value in asking the question!

So the shares came from an ltip scheme and are all still invested in that company, but as they are all in USD and the company is doing quite well, the combination of exchange rate and performance makes them quite a nice earner at the moment. I could cash them in and invest using isa allowances I guess; I was concerned that I would end up paying CGT and lose a lot of the gains I made, but sounds like there is more allowance there than I thought. Is there a simple guide to CGT when selling shares?

It feels at the moment like I have a lot in cash which is earning nowt (40k is in premium bonds, the cash ISAs don't make more than 1% I expect now). The other extreme is my shares which are doing well, but not balanced in a range of companies). In the middle I have this large mortgage I'm stuck with for 3 years (not 2, I made a mistake - and the fee doesn't make it worth repaying as its quite chunky).

I'm unsure how to figure out if investment isas are really a better deal than paying down the mortgage. I think I need to improve my understanding of the tax implications of disposing of my shares, and the allowances for tax for S&S ISAs. Then, when I've got that figured out, I've got to figure out how much I could bring in vs how much I'd save - is that about right?

In terms of getting some professional help with this, is there a particular type of advisor I should be looking to speak to, and how do they usually base their fees?

Thanks for all the help so far!

jimjames

I think you need to reconsider your attitude to risk or take some action on the shares. You may have acquired the shares rather than buying them with your own money but to have over 40% of your wealth tied up in a single company shares is definitely not being risk averse!

Depending on your mortgage you may be able to pay off chunks and then borrow it back but not all mortgages allow that. Certain Nationwide ones do.

badger09

You say you are pretty risk averse, yet have £120k, your total equity investment, in a single company:eek:. That does not make sense to me.

I've never heard of an 'itip scheme'. The nature of the scheme could affect the GCT position, but bowlhead 99 has outlined the basic premise.

You don't mention pension provision for yourself or your wife. Have you considered additional contributions?

Ray_Singh-Blue

You could try looking at your mortgage as a negative bond. (a bond pays you fixed interest, whereas a mortgage costs you fixed interest)

Your £570K portfolio is made up of 114% house, 26% cash, 21% shares and -61% bonds.

Next decide which of those figures you want to change, and use new money to do so. Having -61% bonds may turn out to be super-smart, if bonds crash when interest rates rise.

bowlhead99

Ray_Singh-Blue wrote: »

You could try looking at your mortgage as a negative bond. (a bond pays you fixed interest, whereas a mortgage costs you fixed interest)

Your £570K portfolio is made up of 114% house, 26% cash, 21% shares and -61% bonds.

You confuse matters when you describe it as negative bonds. It is just a long term debt at an interest rate which is variable in the long term but over individual short term slices of the overall term, can be fixed for relatively short periods.

In that sense - of it being a general long term debt - you are right to pull it away from the house and say that it is financing both the cash pile and the shares, as well as the house.

It is good to separate it from the house because clearly there is no point having well over 20% of your portfolio in cash if your emergency fund only needs to be something like 10% and the finance to support the cash pile is coming from a mortgage at much higher APR than the excess cash is earning (i.e. 3.4% cost).

That sentence on a standalone basis would support paying down the mortgage using a large part of the cash pile ; but the mortgage is also supporting the shares portfolio and the dormant excess cash which it supports could be reallocated to investments with a long term return expected to be well over 3.4%. As such, it's not necessary to pay it off unless you are very risk averse, although investigating refinancing it to a lower rate would be sensible.

Next decide which of those figures you want to change, and use new money to do so. Having -61% bonds may turn out to be super-smart, if bonds crash when interest rates rise.

If you have real 'negative bonds' i.e. you have sold them short on the public markets, then if their price crash in value you can buy them back at a super discounted price, and make a killing. So, really having -61% bonds in your portfolio might be smart, if you are prescient and there are rapid interest rate rises.

However, that is not the case here with your 'just look at it like a negative bond'.

If bonds do crash in value as interest rates rise rapidly, his mortgage doesn't go away. Halifax or Nationwide or whoever lent him the money, won't say, "yeah that's fine, bonds are cheaper now so we can't sell your mortgage debt onto a financial buyer for quite as much as we used to be able to, so we'll just consider that you can just pay us back less principal". Far from it.

What they actually do is say, "ah it looks like your mortgage has reached the end of its fixed term, so you're now on our standard variable rate which we have increased, through the roof. If you like, you can move onto an increased fixed rate if you qualify for one of our remortgage deals. Or you could go to a competitor, they have also increased their rates too. Oh and did we mention that because all the rates have gone up across the UK market, people can't afford to pay as much for houses so anyone offering you a remortgage deal will assess your house as lower value and offering lesser security for the loan, so we're going to add a few more pips onto your interest rate for the inherent lower LTV".

That doesn't sound like as a borrower you would make a killing in the same manner as you would have done by a 'super smart' person investing in a portfolio of bond shorts. Certainly, if interest rates go up and bond prices go down, it is *worse* to be a borrower, because the loan that you owe does not cost you any less to pay off in the higher-interest environment. Either it costs the same (because you have some old fixed rate and you will clear it within the remaining term of the fix) or most likely (if you're on a variable tracker or relatively short fix), it is going to cost you more.

So correct me if I've missed something but I think the analogy of 'think of it as a negative bond and you will have been super smart if rates rise', is flawed. Because if rates rise it causes pain not happiness. So, one technical term for your mischaracterisation of a broadly variable rate mortgage debt as being like a negative bond, is: it's balls.

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scoobydoo789 wrote: »

as they are all in USD and the company is doing quite well, the combination of exchange rate and performance makes them quite a nice earner at the moment

This is also balls. An earner means it is earning you money. What you are describing is the fact that it *has* earned you money, past tense, with a large part of it being the dollar value strengthening 20% or so against GBP in recent years. Is the dollar going to do that again in 2017 too, and will the US markets and that company specifically continue to press on to new highs?

Now we know what the shares are, I agree with earlier poster(s) that the £100k+ of shares in one company in one industry out of the 50,000 choices on the planet is massively high risk and the fact that it happens to have done well in the past is neither here nor there. When people talk about getting good long term returns from S&S investments they generally mean from portfolios of investment funds - not having all their eggs in one basket simply because it got given to them as an LTIP from an employer and they decided to hold it and hope they continue to get lucky...

Using both husband and wife's capital gains exemption for the next 2 tax years would allow £44.4k of investment gains to be realised by April 6th 2017 tax free. If that still leaves substantial amounts of shares unsold (because of the gains being massive) then consideration could be given to selling some more of them and just take the tax bill on the chin, to reduce the risk of continuing to hold them. If wife is lower rate tax for this year having been out of work, then transferring to her to sell rather than selling yourself would be more efficient (i.e. only 10% tax rate on gains for basic rate taxpayer).